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Mortgage  Question?
Pay off student loan or credit card before apply mortgage?

We have a $30,000 student loan, two small loans that have been charged-off that we still pay and credit card debt. Is it better to pay off the student loan or the smaller loans when we apply for a mortgage?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Based on the information you provided we recommend that you pay-off your smaller loans first. In your email you mentioned that these loans have been charged-off which is confusing because when a loan is charged-off the account is closed an you can no longer make payments on the loan. Without knowing all the details, I would guess that the loans technically have not been charged off because you are able to continue to make payments on them, which can be positive from a credit report standpoint. In any case, work with the loan lender to develop a plan to pay-off or resolve those loans and make sure that you document what plan you implemented to address that credit issue. Having a written explanation of past credit issues is helpful when you apply for a mortgage.

After you resolve the issue with the three loans our recommendation is that you focus on the debt with the highest interest rate next, which is likely your credit card account. Paying off higher interest rate debt such as a credit card before lower interest rate debt such as a student loan will save you money on interest expense in the long run (of course if the interest rate on your credit card is lower than your student loans then you would pay off the student loans first). If you have multiple credit card accounts and you are able to pay them all off some mortgage lenders may request that you close some of your accounts but that is a good problem to have and you can wait until you apply for your mortgage and receive feedback from your lender to make that decision.

Please note that qualifying for a mortgage depends on your credit score and other borrower qualification requirements. Any past credit issues (such as the charge-offs) may hinder your ability to qualify for a mortgage or may result in you paying a higher interest rate. We offer advice on How to Get a Mortgage with Bad Credit and How to Improve Your Credit Score Before You Apply for a Mortgage on FREEandCLEAR. Reviewing these resources will help you understand your options and make more informed decisions when you get a mortgage.

Finally, there are multiple mortgage programs for borrowers with lower credit scores and most of these programs require a low or no down payment. We provide a summary of low / no down payment mortgage programs on FREEandCLEAR and also provide a comparison table so you can review the key features of these programs. Of particular note is the FHA Mortgage Program that enables borrowers to purchase a home with a 3.5% down payment and minimum credit score of 580. Additionally, the NACA Mortgage Program enables borrowers to purchase a home with no down payment and no closing costs. The NACA program uses a character-based borrower credit evaluation instead of requiring a minimum credit score.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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